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The impact of Blockchain on the insurance industry

06 September 2016 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

The media has been teeming with articles about how technology will impact the financial services industry. The issue for those within the industry though is that precious few of these articles make actual reference to how and what will affect the industry.

KPMG is of the opinion that technology will have a huge impact and recently published an article within its annual Insurance Survey focusing on the impact that Blockchain will have; particularly on insurance.

Profiling the disrupter

To understand Blockchain, one must understand Bitcoin, another technology disrupter.

Bitcoin is one of the world’s first crypto currencies. Defined by the Oxford dictionary as a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank, Bitcoin allows transactions to occur independently of any banking institution, making it disruptive in its own right.

“However, the key technology which allows crypto currency to exist is called Blockchain. Just as email is the application that runs on the internet, similarly Bitcoin is the application that runs on Blockchain. I believe that Bitcoin will be remembered as the innovation that brought Blockchain technology into our everyday lives,” says Nevellan Moodley, Senior Manager Technology Regulatory at KPMG.

He adds that a Blockchain is a database with the following characteristics:

-               It is public, meaning it is not owned by a single person or company;

-               It is decentralised, which means it is not stored in a central location but across several computers around the world. And;

-               Its synchronicity means every decentralised copy of the database is always the same.

This could be visualised as an excel spreadsheet that belongs to no single person but everyone in a specific community is in possession of a live copy at any given point in time. The spreadsheet is completely encrypted so while you may be able to see what is on the spreadsheet, it resembles a series of symbols which require decoding.

The industry impact

“Blockchain is a perfect example of business unusual, with this technology posed to have a major impact across all sectors. The insurance sector could be disrupted significantly in the near future and this represents an exciting change in the industry with insurance potentially becoming cheaper, more inclusive and more personalised,” says Moodley.  

He expands by saying that a smart contract is a piece of software that automatically verifies the contract and thereafter executes the agreed terms. The following innovative ways have been proposed for smart contracts to be used on blockchain:

At the London FinTech Hackathon, the winning team utilised smart contracts to develop an innovative solution in the provision of late flight insurance. Their business case was based on the fact that 550 000 airline passengers in the UK did not claim on their insurance for delayed flights partially due to the difficulties experienced in the claims process.

The team presented a smart contract system that provides direct compensation for affected passengers by connecting data feeds with flight information and smart contracts on the blockchain.

“Another example is in agricultural insurance where there are payouts if rainfall exceeds or is less than 10% of average rainfall figures in your geographic area as compared to the previous three years. Weather data is fed into the smart contracts from an independent source. Upon the condition being met, a claim payment is instituted in compliance with the terms of the contract without any human intervention,” says Moodley.

The Internet of Things

According to Moodley, the Internet of Things allows us to introduce innovation in the claims process through the Blockchain as follows:

-               Motor vehicles with built-in sensors will provide data upon a vehicle involved in an accident which will provide the Blockchain with the number of sensors impacted as well as the average force. Based on the conditions programmed on the smart contract, this will result in the claim being paid out before a tow truck arrives at your vehicle; and

-               Motor insurance premiums which are charged on a trip-by-trip basis.

The other side of the coin

Blockchain does offer demonstrable advantages in terms of administration and efficiency, and we cannot ignore these advantages.

But there are other aspects which we need to be weary of. If we look at the example provided where the smart contract will pay a claim out in the case of a motor vehicle accident before the tow truck arrives; we need to be weary. There are many variables that need to be taken into consideration, variables that a sensor cannot quantify.

Editor’s Thoughts:
Blockchain will impact the industry, whether this will be positive or negative remains to be seen. However, insurers and brokers need to be aware of this technology. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by Simon Dingle, 09 Sep 2016
It's interesting to see the first experimentation with smart contracts in the insurance industry, where they will have a huge impact. In the past contracts were written in human languages like English - sort of - by lawyers. If a contract was disputed, a court would argue about the meaning of the language employed. Now contracts can be written in code on the Ethereum blockchain, and that code can't be questioned in the same way a language like English can. I'd suggest that anyone in the legal profession start looking into the Solidity programming language that is used to code contracts in Ethereum. Insurance is just the beginning.
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Added by JS, 06 Sep 2016
Well structured article.
Great Comment, Kobus.

"The times, they are a changing!!"
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Added by Kobus Kleyn, 06 Sep 2016
Great article. One of the Bitcoin claims is that its block chain cannot be hacked. I would disagree for the following facts and with concern:

Fact 1: Bitcon has been hacked several times. In 2016 Bitfinex lost $ 70 million and in 2014 with Mt. Gox, a bitcoin exchange based in Tokyo, Japan who was handling 70% of all bitcoin transactions at that time, suspended trading, closed its website and exchange service, and filed for a form of bankruptcy protection from creditors and lost most of the $450 million from their "hotwallet".

Blockchain will in some form or other certainly become the biggest Disruptor to date within our profession but care must be taken that your money is not under " Block & Chain" without access or losses.

My article on the subject matter can be viewed under my LinkedIn profile at ://www.linkedin.com/pulse/20141119094014-4245433-bitcoin-or-not?trk=mp-author-card.


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